A guide to the various legal structures available when starting up in business
If you are thinking of starting your own business, make sure you give consideration to the legal structure. The most common are sole trader, or partnership (where there are to be more than one owner of the business) or you can form a limited company.
The sole trader route has a simple and clear format and tax matters can be dealt with relatively easily. You will be personally liable for the debts of the business which could include rent on any lease of premises. Unless your spouse has provided personal guarantees for the business debts, he or she cannot be held liable for business debts. For tax purposes you will be self employed (so far as this business venture is concerned) and you must register with HMRC. As with a partnership, you will pay tax twice yearly and make national insurance contributions as a self employed individual.
In a partnership, each partner enjoys self employed tax status and is liable for all the debts of the partnership. If your spouse is also your business partner, any interest your spouse has in the family home would be available to creditors. There are no formal legal requirements in setting up a partnership but it is prudent to have a partnership agreement. If you do not have a formal agreement setting out profit split, the law dictates that all profits and losses of the partnership are split equally between the partners.
Arguably a limited company is a better option where there are considerable financial risks, as it is a separate legal entity from the individuals running the business. However invariably personal guarantees are required from banks and landlords which can erode the financial protection afforded by limited liability status. There are formal requirements in establishing the company, annual obligations in relation to filing documents at Companies House and company details, including accounts, are available for public inspection. It is important to check that there are no other businesses, primarily competing businesses, with the same or similar names to the one you intend for your business. Basic checks should be made on the companies house website, on the web generally and local directories. It is wrong to assume that if you are successful in registering a company with the name of your business, that another business with the same or a similar name cannot challenge you. There are laws in place to protect business owners if they can establish that your trading is likely to cause confusion to the public. If you intend to lease premises, consider carefully the terms of any lease. In addition to the usual negotiations on rent free periods for fit out and break clauses, give careful consideration to the repairing clauses. It is not unusual for a tenant to enter into a lease of premises within a building which has not been kept in good repair where the lease includes full repairing obligations on the tenant together, possibly, with an obligation to ensure that the premises comply with current statutory obligations.
In addition to obligations on you during the term of the lease, this would allow the landlord to serve a schedule of dilapidations at the end of the lease attempting to have the building repaired to a better state than it was when you took your lease. If the repairing clause is interior only, ensure that there is an obligation on the landlord to repair the exterior and that the costs are not being passed on to you under another provision in the lease.
Celia Worthington, senior partner of the Commercial Department of Worthingtons Solicitors Belfast.